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Thursday, Jun 10, 2004

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The power of ideas

A. Vasudevan

Development should be the new mantra. Approaches are many, but an idea can be had from a Plan document prepared by Prof Raj Krishna and Prof D. T. Lakdawala in 1978, that underscored private sector dynamism to propel growth and create jobs. Th e document felt public sector investment should be guided by availability of resources, avoiding inflationary financing. A. Vasudevan looks at these and other ideas.

THE INTEREST in pinpointing the exact year when the trajectory of economic growth in India has exceeded the `Hindu' rate of growth has been growing. The current average annual growth rate of 5.7 per cent since 1980 exceeds the Hindu rate of 3.5 per cent achieved from the First Plan up to 1978. Some writings point out that economic reforms that were initiated in mid-1991 have helped to bring about the current outcome.

More recently, a number of writers, both Indian and foreign, have pointed out that the transition to the higher growth trajectory began from or `around' 1980. There is also a view that most of the ideas of the reforms package of the 1990s were found in the reports of the committees chaired by P. C. Alexander and Vadilal Dagli of the second half of the 1970s.

When Prof Raj Krishna coined the term, the "Hindu" rate of growth in 1977, he did it in the context of development planning. He along with the then Deputy Chairman of the Planning Commission, Prof D. T. Lakdawala, was instrumental in working out the Five-Year Plan in 1978, a document that is now almost forgotten, wherein the importance of private sector dynamism in propelling growth through incentives and in creating employment was underscored.

The document, however, did not advocate a free, unregulated industrial development. It did not find evidence to suggest that extension of state control and ownership would raise growth or create employment on a sustained basis. It also felt that public sector investment should be guided by the availability of resources. Inflationary financing of government-propelled development would need to be eschewed.

Ammunition for attack

The quintessence of the Plan document, however, was not captured; instead, the idea that planned investments could be `rolled' depending on the availability of resources provided the ammunition for attack. The times were such that the power of the logic of public sector investment planning in the presence of not-so-dynamic private sector could not be addressed without sufficient evidence relating to the Indian economy. The evidence was not so strong then, given the fact that most industrialised economies were not performing well mainly owing to the oil price shock. Besides, there was an apprehension that the idea of rolling Plan would be used as an excuse for not raising public investment.

The document, however, heralded a change in the attitude towards the strategy of development. Employment creation is essential along with growth but that would not be possible with mere expansion of the public sector. Private sector development would become necessary for employment generation as well as efficiency of investment.

All this is history and perhaps not so relevant to the present times. But let us recognise that the ideas of the late 1970s influenced the latter day thinking albeit in a somewhat `refined' way. In the 1980s and the 1990s, the emphasis was on growth. Employment creation was not as exciting as growth. It was argued, somewhat erroneously that once growth is accelerated, expansion in employment would follow automatically. Surprising as it might sound now, policy-makers seemed to have ignored the famous discussion on the choice of techniques during the second half of the1950s.

Strategy of the 1980s

The policy strategy in the initial years of the 1980s was aimed to achieve `incremental gradualism' towards attainment of higher growth, not development.

The pattern of growth was towards modernisation of industry and development of new activities. The medium-term fiscal strategy, the focus on the efficiency of public sector undertakings, the `broad banding' of some of the activities hitherto dominated by the public sector, the flexible administered pricing of commodities, some reduction in trade restrictions, the gradual depreciation of the exchange rate and the movement towards monetary targeting were some of the major ideas that were pursued but with different degrees of emphasis.

For example, fiscal prudence that was the hallmark of the early 1980s partly on account of the extended fund arrangement was given up by the end of the decade. To cite another example, the large build up of foreign exchange reserves by 1985 was brought down by the end of the decade by investments through large-scale imports facilitated by fiscal deficits, all again in the name of growth, without making any significant difference to India's foreign trade regime.

Serious economic problems emerged in India whenever fiscal imprudence (between 1955-58, again in the early 1970s, and in the second half of the 1980s) and exogenous shocks (war situations of the 1960s and early the 1970s, famine conditions in 1965, 1979 and again in 1987 and oil price hikes in 1973-74, 1979-80, and 1990) occurred.

It was clear by 1991 that the rate and pattern of growth of the 1980s could not be sustained unless the fundamental question of recurrence of crisis-like situations was addressed. The 1991 reform package was the answer to the question.

Comprehensive reforms

The reforms package was fairly comprehensive and included social safety nets and some employment generation. But policy announcements would be of no use unless they are converted into schemes that could be implemented.

Here arose gaps besides insufficient implementation: they slowed down growth after the initial enthusiasm had melted away, thereby aggravating the unemployment problem. Manufacturing did not post any significant gains in the 1990s unlike in the 1980s. Nor did agriculture. The one that grew substantially was the services sector from the relatively stable position in the 1980s. But this alone could not provide the needed employment.

The shift in the composition of growth as between the two decades shows that while capital accumulation was the main driver of growth in the 1980s, productivity seems to have also contributed to growth in the 1990s.

Had productivity gains been strong in the 1980s, there would have been no need for shifting the economic regime. The productivity factor points to possibilities of accelerating average growth in future. However, growth sans sectoral balance, higher employment and commodity price stability is not what the people seek as the results of the recent elections indicate. The number of objectives has gone up, requiring the policy maker to wield adequate instruments in terms of number and effectiveness.

Our agenda is not something unique. Even in an advanced country like the US, the common person would seek larger employment, lower taxes, medicare, social security and education, and lower oil prices.

We also seek more or less the same over the medium term. The policy announcements would gain credibility if the strategies and the data base underlying them are communicated to the wider public in a transparent manner. The recent appointment of a Commission on Agriculture indicates that the medium-term policy direction is right.

The Government should also use the present right time to have detailed investigations into the state of the urban ghettos, and the approaches required to convert them into productive enclaves.

Besides, given the ageing of the population, one wishes that there were also commissions on education, and health. Development, not growth, should be the new mantra.

(The author, a former Executive Director of the Reserve Bank of India could be accessed at

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